Nuclear Decommissioning Authority: Managing risk at Sellafield - Public Accounts Committee Contents

2  Maximising value for taxpayers

8.  The Authority was not in a strong position to ensure risk transfer to the private sector when it ran the competition for the contract to manage the Sellafield site in 2008 as it did not have a coherent plan for the site or an adequate understanding of the scope, schedule or cost of the work required. The Authority told us that it would have been theoretically possible to build some sort of risk transfer into the contract. However, the Authority told us that for the terms to be acceptable, the premium demanded by bidders from the Authority would have been astronomical. The Authority therefore proposed a cost reimbursement contract and accepted that none of the final four bidders in its competition for Sellafield would take on any financial risk.[19]

9.  Many of Sellafield Limited's contracts with its subcontractors are undertaken on a cost reimbursement basis or involve only limited transfer of financial risk, owing to the continuing uncertainty over the true costs of the work on the site. Only one of the 14 major projects at Sellafield involves a fixed cost contract.[20] This means taxpayers, rather than Sellafield Limited or its subcontractors, bear the full cost of the work on the site regardless of whether there are delays and cost overruns.

10.  The Authority told us that it now had a more complete and more coherent plan. It also told us, nevertheless, that it remained a long way away from having the certainty on costs necessary to be able to transfer risk to the site management company. Instead it has encouraged Sellafield Limited to pass some of the risk down to the supply chain for specific projects or programmes. The Authority told us that this had been done where there was good benchmarking and reliable data on which to base an estimate of a target or fixed cost and that Sellafield Limited was looking at whether there is scope for further risk transfer through the competition for the silos direct encapsulation plant.[21]

11.  Nuclear Management Partners claimed to have achieved efficiency savings worth £700 million since 2008.[22] By the end of the first contract term in 2014, it expected to have achieved just enough savings—£1.15 billion—to meet the minimum performance standard required to enable the contract to be renewed, that is 80% of the savings it offered in its original bid for the contract to run Sellafield.[23] Some of these savings came from Sellafield's reduction of the proportion of its spending on support and overhead costs, as staff had been redeployed from support and overhead activities into frontline activities. Following our review of decommissioning in 2008, the Authority committed to reducing support and overhead costs across its estate by 25% over four years. The Authority told us that Sellafield was ahead of schedule against this target.[24]

12.  The level of efficiency savings achieved determines the fees earned by Nuclear Management Partners and will be a factor in the Authority's forthcoming decision on contract renewal. In 2011-12, the Authority paid £54 million in fees to Sellafield Limited, which it can pay on as dividends to Nuclear Management Partners. The contract with Sellafield Limited provides for fees which are performance related so that Sellafield Limited can earn more money if it works quicker and for lower cost. In the case of the evaporator D project, whose lifetime costs have increased by almost £250 million since 2009, the Authority has paid Sellafield Limited small amounts of fees but reported that overall Sellafield has so far lost fees of £17 million and could lose a further £25 million.[25]

13.  It is vital—if the taxpayer is to get a good deal from this contract—that past and future 'savings' figures are properly tested.[26] The Authority's central audit function and its 'site-facing team' based at Sellafield examined and verified these savings figures. But the National Audit Office have looked in detail at Government savings figures in the past and established that claimed savings have often been overstated. [27]

14.  In addition to fees, the Authority also pays Sellafield Limited significant sums for executive and expert staff on secondment from Nuclear Management Partners. In 2011-12 it paid £17 million for experts seconded from Nuclear Management Partners' constituent companies, known as 'reachback', at an average of some £270,000 per head, and £11 million for senior executive staff, at an average of £690,000 per head, to bring in international expertise. The cost of Sellafield Limited's highest paid Director was just over £1.2 million. While these totals include some other costs, such as re-location costs for expatriate employees, they represent huge salaries, not least considering the economy in the North West.[28] The Authority does not operate a cap on salaries at Sellafield, unlike in the United States, where the Department of Energy has set a cap of $750,000 on executive pay. The Authority told us that Sellafield's rates were necessary in a competitive market to ensure that it could secure the skills it needed. However, it admitted that it had struggled for some time to get an adequate description of why 'reachback' was being used on occasions. There is therefore a risk that Sellafield Limited and Nuclear Management Partners are making additional money at the taxpayers' expense.[29]

15.  Nuclear Management Partners' constituent companies can also make profits through contracts from Sellafield Limited. Contracts between Sellafield Limited and Nuclear Management Partners' constituent companies AMEC, AREVA and URS accounted for 6% of total procurement spending at Sellafield in 2011-12, worth £54.4 million. This total could rise in future, particularly as Sellafield Limited lets major framework contracts. The Authority required Sellafield Limited to make sure it did not give contracts preferentially to its parent company's constituent businesses and the Authority examined such contracts in particular detail. The Authority told us that this arrangement was standard practice in the decommissioning industry and that it had sufficient controls in place, but recognised that it could be perceived differently.[30]

16.  Sellafield Limited spends almost £1.6 billion of public money each year.[31] This major investment by the taxpayer has the potential to achieve considerable sustainable economic benefits for the region and for the UK.[32] Almost £1 billion is spent annually on procurement by Sellafield Limited and it is important that this spending supports local regional innovation and provides work for local companies and employment for local people. Sellafield Limited has made arrangements to give local visibility of the work available on the site and has worked with its large suppliers to encourage them to engage with the local supply chain.[33]

17.  Sellafield Limited, Nuclear Management Partners, the Department for Business, Innovation and Skills and the Department of Energy and Climate Change are all involved in initiatives to support the development of the nuclear supply chain. Both Sellafield and Nuclear Management Partners have funded the Britain's Energy Coast organisation, which is the main economic development agency in this area, and have provided funding worth £7 million between them. Britain's Energy Coast is due to publish a blueprint for local economic development[34] and the Department of Energy and Climate Change has developed a strategy for building a UK supply chain for the whole nuclear industry.[35] However, there was no clear ambition or targets for maximising the impact of taxpayers' money spent at Sellafield in terms of job creation, business support or skills development in the area [36]

19   Q 62 Back

20   Qq 58, 60-61 Back

21   Q 62 Back

22   Q 62 Back

23   Q 145-146, 152 Back

24   Q137 Back

25   Qq 34-39, 103 Back

26   Q150 Back

27   Qq 150-152 Back

28   Qq 68, 70, 79 Back

29   Qq 68, 74-81, 128 Back

30   Qq 88-93 Back

31   C&AG's Report, para 5 Back

32   Q105 Back

33   Qq 106, 109, 115 Back

34   Qq 106-107 Back

35   Qq 107, 113 Back

36   Q 114 Back

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Prepared 4 February 2013